Are personal guarantees unlimited?

Taking out a business loan can help business owners to unlock new growth opportunities, so it is unsurprisingly a popular option for entrepreneurs seeking commercial funding.

If the business is successful, it is also an excellent opportunity for lenders, who will earn interest on the loan, and have it repaid in full – but what happens when this isn’t the case?

In the case that the business does not meet it projected turnover and is unable to pay its loan, lenders will find themselves in a difficult position.

For this reason, many commercial banks and other lenders seek to protect their investment with a legally binding guarantee that the borrower will repay the loan, plus interest.

For smaller businesses, one of the more common ways of doing this is through a personal guarantee.

What is a personal guarantee?

This is an assurance from a business owner, partner or other executive that they will personally assume the debt if the business is no longer able to make its repayments.

While clearly a potential door to higher loans and more favourable terms, this can represent a significant risk to borrowers.

For business owners looking to secure a loan through a personal guarantee, it is first important to understand the two types and how they might impact personal finances.

Limited vs unlimited

There are two types of personal guarantees which may be used – limited and unlimited.

An unlimited guarantee, also known as an unconditional guarantee, means that the guarantor (the person giving the guarantee) is required to pay all amounts due to the lender.

As the name suggests, unlimited personal guarantees allow the lender to recover the entire loan amount, plus interest and legal fees, by whatever means possible, if the borrowing business defaults on its loan.

This means they can take money from a director or guarantor’s personal assets, such as savings or properties.

In contrast, a limited guarantee allows the lender to recover only a certain percentage of the loan from a given individual. This is commonly used when there is more than one director or guarantor covering the value of the loan.

Which is better?

It depends on the point of view!

For lenders, to obtain the best security, it is generally best to obtain an unlimited personal guarantee.

For borrowers, it is clearly best to negotiate a limit on the sum of money that the lender can recover under the personal guarantee, and this should be no more than the value of the loan.

In practice, it is usual a personal guarantee to be limited, but the interest and expenses will be payable in additional to the amount secured through the guarantee.

The costs associated with the preparation and completion a personal guarantee is likely to be in the region of £500 to £1,500 (plus VAT and disbursements).

For further advice on obtaining or using a personal guarantee, please contact our team of experts today.

In the UK, there are three different types of leave available for parents: maternity leave, paternity leave, and unpaid parental leave.

To support you in meeting your responsibilities as an employer, we will be looking at maternity leave and what you need to provide for staff.

Maternity leave allows employers to take time off work both during their pregnancy and following the birth of their child to recover and adapt to being a new parent.

Employers must ensure that they comply with their legal obligations and look to reclaim any Statutory Maternity Payments that they make.

This is especially important following the recent changes to redundancy protections for employees on maternity leave.

What are employees entitled to?

Employees who are pregnant can take up to 52 weeks of maternity leave. This is divided into two parts, with the first 26 weeks being ‘Ordinary Maternity Leave’ and the following 26 weeks classed as ‘Additional Maternity Leave’.

Unless the baby is born early, maternity leave can be taken up to 11 weeks before the expected week of childbirth.

Employees must take at least two weeks off after the birth, or four weeks if they work in a factory.

As well as this leave, pregnant employees are now entitled to enhanced protection from redundancy. This includes getting priority for alternative employment within the company.

Pregnant employees also face protection from discrimination under the 2010 Equality Act, as pregnancy is classed as a protected characteristic. This means that staff cannot be treated differently for being pregnant and going on maternity leave.

How much should staff be paid?

Whilst employers can opt to pay more than Statutory Maternity Pay (SMP) to their staff, you must ensure that you are paying at least the minimum.

SMP can be paid for up to 39 weeks, paid at the rate of:

• 90 per cent of their average weekly earnings (AWE) before tax for the first six weeks
• £184.03 or 90 per cent of their AWE (whichever is lower) for the remaining 33 weeks

Tax and National Insurance will be deducted from this.

You can usually reclaim 92 per cent your payments even if you pay over the statutory amount.  Employers who qualify for Small Employers’ Relief (that have paid £45,000 or less in Class 1 National Insurance – ignoring any reductions like Employment Allowance) may be able to recover more of their SMP.

Keeping correct records

To ensure compliance with HM Revenue & Customs (HMRC), you must keep records of maternity leave taken by staff.

This includes:

• Proof of pregnancy
• The date SMP began
• Your SMP payments and dates
• The SMP you have reclaimed
• Any weeks you did not pay and why

These records must be kept for 3 years following the end of the tax year they relate to. Doing this ensures tax compliance as well as legal compliance.

Ensuring employees are eligible

To be eligible for SMP, your employee must:

• Be on your payroll in the 15th week before the expected week of childbirth
• Provide you with notice
• Provide proof of pregnancy
• Have been employed by you for at least 26 weeks before the 15th week
• Earn at least £123 a week (gross) in an eight-week period

If your employee does not fit with the above, they may not qualify for SMP and you can refuse. Instead, they may be able to get Maternity Allowance.

To officially refuse, you must provide your employee with the SMP1 form within 28 days of their request for SMP or the birth.

If you are unsure whether your employee is entitled to maternity leave and SMP, it may be helpful to seek the advice of an employment law expert. They will be able to look at your employees’ contracts and help you reach a decision.

If you would like more advice on providing parental leave for your staff, get in touch with our team today.